Euro area inflation figures and US jobs report to shape the week

In focus today

In the euro area, this week's focus is on the flash HICP inflation print for September, with data from Spain and Belgium due today. We expect euro area HICP inflation to rise to 2.3% y/y (prior: 2.0%) mainly due to energy price base effects, while core inflation is also expected to increase slightly to 2.4% y/y (prior: 2.3 %) on services-related base effects, particularly airfares. Core inflation momentum is likely to remain steady, making the rise in yearly rates largely base effect-driven, limiting hawkish signals. Hence, we could see a decline in interest rates despite the yearly growth rate of inflation increases, if the month-on-month developments are weaker than expected.

Overnight, the Reserve Bank of Australia (RBA) will have a monetary policy meeting. We expect no policy rate changes, in line with market pricing. Markets believe that the RBA will eventually deliver at least one more rate cut over the winter period. 

The Riksbank will publish the minutes from last week's policy rate decision. While we already know that Anna Seim entered a reservation against the rate cut, it will be particularly interesting to understand her reasoning. For the other board members, we will focus on nuances in their statements to identify any potential candidates for a more hawkish stance going forward. Anna Breman's elaborations will hold less relevance for future decisions, as she will leave the Riksbank on 10 October and will not participate in further interest rate decisions. Until a replacement is appointed, the board will consist of four members, with Erik Thedéen holding the casting vote in the event of a tie.

Looking ahead, this week features a packed economic calendar, the US September jobs report, and Japan's LDP leadership elections. A potential US government shutdown remains a risk this week, with negotiations still ongoing. While such shutdowns typically have limited macroeconomic impact, they could result in significant disruptions, including furloughs for hundreds of thousands of public workers. Efforts are underway to pass a short-term funding bill to extend government operations until 21 November, requiring bipartisan support in the Senate.

Economic and market news

What happened over the weekend

In oil markets, Reuters exclusive reported that OPEC+ is expected to approve a 137,000 bpd output hike for November at its 5 October meeting, continuing the gradual reversal of prior cuts. Brent crude rose above USD70/bbl on Friday, supported by Ukrainian drone attacks on Russia's energy infrastructure. However, OPEC+ often falls short of targets, as many members are already at capacity, heightening market concerns over shrinking spare capacity.

What happened Friday

In the US, August PCE closely matched expectations for both prices and real consumption growth, as core PCE came in at 2.9% y/y. Real consumption was revised up by USD 180bn (+0.9%), driven by a positive revision to household incomes. Overall, consumption remains a clear growth driver in Q3.

Tariffs and the euro area, Trump announced 100% tariffs on pharmaceutical goods as well as additional tariffs on heavy trucks, cabinets, and upholstered furniture. Pharmaceutical producers with manufacturing facilities either in place or in construction in the US will be exempted from the tariffs. This alleviates the impact on the EU economy, as this includes majority of the largest EU producers. In addition, EU's heavy truck exports are just EUR 430m annually, and total furniture exports (including unaffected items) amount to EUR 5bn (0.03% of GDP). However, the announcement underscores ongoing tariff uncertainty, despite a trade agreement.

Equities: Equities ended mostly higher on Friday, snapping a three-session losing streak. Nevertheless, global equities finished the week lower despite stronger macro data, primarily from the US. Rising yields kept equities under pressure, though the selloff was far from a true "risk-off" move. Instead, the weakness was concentrated in defensives (staples, health care) and high-multiple sectors such as communication services and technology. By contrast, value cyclicals - including materials, energy, and banks - were particularly strong. As for health care, weakness came from new tariff threats on pharma, but the downward pressure dampened in the afternoon following White House confirming that EU will have a 15% tariff on pharma products, not 100%. Within equities, we continue to favour banks, materials, and health care, and therefore expect similar market dynamics in the weeks ahead.

FI and FX: EUR/USD rose in the latter part of Friday's session, breaking back above the 1.17 mark. US yields carried upward momentum through most of last week, partly driven by stronger-than-expected data, though Friday's moves were relatively muted with yields essentially unchanged across the curve. This week, we head into a pivotal week for markets and the Fed, with a heavy slate of US labour market data. In Europe, Friday was also a quiet session, with front-end yields unchanged, while the 10Y and 30Y Bund yields declined 2bp. The modest long end-led move resulted in a mild bull flattening of the German curve. The oil price rose above USD70/bbl on Friday for the first time in almost two months. The rebound could be due to geopolitical uncertainty and in particular potential for more sanctions on Russia taking the focus from the impact from rising OPEC+ production and the higher tariffs.